愛德士 (IDXX) 2004 Q2 法說會逐字稿

Good day, everyone, welcome to the IDEXX Laboratories second quarter 2004 earnings analyst conference call. As a reminder today's call is being recorded. For opening remarks and introductions we will now turn the conference over to Mr. Conan Deady, Vice President and General Counsel of IDEXX Laboratories. Please go ahead sir.

Thank you, Mike. Good morning, everyone. Thank you for joining us here on the call this morning. I am going to start this morning with the familiar Safe Harbor language. I will then turn the call over to Merilee Raines who will review the financial results for the quarter. Jon Ayers will then add some further commentary on the quarter and on our business generally and then we'll open the call up to your questions.

First let me introduce the other people who are with us here this morning. Bob Hulsy, Corporate VP in the Companion Animal Group, Laurel LaBauve, Corporate Vice President for Worldwide Operations, and Ed Garber who is our Director for Financial Planning and Analysis. Statements we may make on the call regarding management's future expectations and plans and the Company's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation and Reform Act of 1995. These statements are based on management's current expectation of future events which are subject to risks and uncertainties. These risks and uncertainties include the timing and success of new product introductions, demand for our products and market acceptance of new products, availability of products and materials supplied to us by third parties, intellectual property protection of products and the impact on our business of governmental regulation, government approvals, competition and technological change. A further description of these risks and uncertainties is contained in our quarterly report on form 10-Q for the quarter ended March 31, 2004 which is on file with the SEC. In addition any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future we specifically disclaim any obligation to do so even if our estimates change. Merilee.

Thanks Conan. And good morning, everyone. As Conan’s mentioned, first I would like to give you an overview of our second quarter financial performance and then I will turn it over to Jon Ayers for some comments on the business and our outlook for the remainder of 2004 and full year 2005. We will then open it up to you for questions.

As you have seen, this morning we reported revenues of $137.4 million, and earnings per share of 66 cents. Year-to-year increases of 13%, and 40% respectively. As was noted in our earnings press release, there are few items that positively impacted earnings, which I would like to review as they are important to understand when we talk about ongoing business performance and future financial guidance.

First, and most significant, a reduction in income tax expense provided a net 6 cents favorable impact to earnings per share, compared to guidance given at the end of the first quarter. This primarily relates to the completion of an IRS audit through the year 2001. And changes to certain state and international estimates. These items produced 8 cents of EPS favorability and were partially offset by a change in our estimated effective tax rate for the year, from 32 to 33.25%. This year-to-date adjustment to tax rate produced a 2 cent unfavorable variance for guidance for the quarter which nets the impact of the tax items to 6 cents. The adjustment of the tax rate is the result of changes in our forecasted international earnings mix.

All other things equal, the change in effective tax rate from 32 to 33.25% will produce a 1cent reduction to earnings per share in each of the third and the fourth quarters which is reflected in our updated guidance for the balance of the year, and guidance for 2005.

Second, we had a couple of events which together favorably impacted earnings by 3 cents. We revised the estimate on our potential liability to a third party for a patent-related claim, based on new facts and circumstances. And we received a payment of $525,000 in the quarter in connection with a settlement of some litigation. So taking all of these items into consideration, our performance, excluding these items, was 57 cents, or about 5 cents above street expectations, very solid results. As mentioned, the total Company revenue of 137.4 million marked a 13% increase over the quarter of 2003. Or 10% on a constant foreign currency basis.

Our Companion Animal Group revenue of 112.7 million grew 14%, or 12% adjusted for foreign exchange. Within Companion Animal Group, sales of instrument consumables of $33.2 million increased nearly 10.5% year-to-year or just over 7.5% adjusted for currency. Laboratory services of $27.8 million increased by almost 19.5% on a reported basis. Lab acquisitions completed over the course of the past 12 months increased lab services revenue by 6%, and foreign exchange contributed another 3%. So growth and lab services adjusted for these two factors was a little over 10%.

Sales of rapid assays of $27 million increased year-to-year by 8% or 6.5% on a constant currency basis. As we have noted in previous quarters, in addition to currency fluctuations, year-to-year revenue growth rates for rapid assays and instrument consumables are impacted by changes in U.S. distributor inventory levels. This quarter, there'll be overall net change in inventories was (ph) relatively the same as last year, there were fluctuations within product categories. Notably, the year-to-year growth rate for rapid assays was negatively impacted by a reduction in distributor inventory versus last year and instrument consumable growth was favorably impacted by the relative year-to-year inventory changes. Measured in terms of weeks of forward sales our second quarter ending U.S. distributor inventories remained in the same three- to four-week range where they have been for the last several quarters.

As we have said in prior calls we continue to view our longer term organic growth rate for instrument consumables to be 4 to 6%. Rapid assays 7 to 9%, and laboratory services 9 to 11%. When you look beyond the impact of quarterly fluctuations and currency and distributor inventory levels.

Instrument revenues increased approximately 19% to $8.9 million driven by strong placements across the entire vet lab suite of instruments. In the quarter we placed 322 laser sites at an average selling price of over $17,000. The instrument is performing well in the field, and in the quarter we saw some positive impact from our efforts to improve product stability and manufacturability, which I will discuss further in gross margin comments. Our computer systems product line grew 6% to $5.4 million, and our pharmaceutical product line reported $3.1 million of revenue.

In early June, we launched SURPASS, our equine therapeutic for joint inflammation with initial distribution stocking orders totaling $700,000.

Food diagnostics segment reported revenues of $11.6 million, were essentially flat both year-over-year and sequentially but declined by about 4.5% on a constant currency basis year-to-year.

The water business with sales of $13 million, grew by 15%, or about 11.5% adjusted for exchange.

International revenues of $42.1 million were 31% of our total revenues. Stronger international currencies year-over-year contributed about $3 million or nearly 2.5% to top line growth.

For Q3, we expect revenues to grow about 12% to $134 to $135 million.

Turning to other elements of the P&L, the gross margin for the quarter was just over -- was about 52.4%, adjusting for the reduction in our estimated liability for a third-party claim, which I mentioned previously, the gross margin was 51.8% of sales, about 2 points above our guidance and about 2.5 points better than last year. The improved performance is primarily attributable to the favorable impact of exchange, improving costs associated with the manufacture and support of LaserCyte and favorable manufacturing and service costs driven by volume leverage.

For the balance of 2004, we expect to see gross margins at 49 to 50% of revenue, based on both revenue mix and cost considerations.

Research and development was $8.7 million, or 6.3% of sales. In the second half of 2004, we expect R&D expense to be between 6 and 7% of revenues. SG&A of $32.3 million or 23.5% of revenues compares to $27 million or 22% of revenues for the second quarter of 2003. Adjusting for the litigation settlement in the second quarter of this year, SG&A becomes $32.8 million, or approximately 24% of revenues. This year-over-year increase in spend is consistent with our guidance and reflects the investments we are making in sales, sales support and marketing, primarily in our Companion Animal Group, to continue to strengthen our customer franchise, and to drive long-term top line and bottom line growth. We expect SG&A to be about 24 to 25% of revenue for the second half of the year.

Operating margin of $31.1 million or just under 23% of revenue compares to $24.3 million, or 20% of revenues for the second quarter of 2003. Adjusting for the change in third--the charge in the third party claim – as to change in the third party claim estimate and the litigation settlement, the operating margin becomes $29.7 million, or 21.5% of revenue. As a percent of revenue, the margin -- as a percent of revenue this margin was about 2 to 2.5 points above the guidance we gave in our Q1 earnings call, primarily due to the higher than anticipated gross margin. For ensuing quarters we expect operating margins to be about 18.5 to 19.5% of revenues.

Cash and investments ended the quarter at $234 million, which was a decrease of about $9.3 million from the end of March. Cash from operations was $33.2 million, and purchases of fixed and other assets were approximately $12.5 million to produce free cash flow of $20.7 million. Fixed asset purchases were higher than the norm in the quarter due to facility expansion activities at our headquarters in Maine and our reference laboratory in the United Kingdom.

We repurchased 573,400 shares of stock in the second quarter at a weighted average price of about $62 for a total cost of $36 million. Day sales outstanding was 40 days, up one day sequentially and two days year-to-year. Inventory of $79 million increased $3 million from the first quarter, primarily due to increases in LaserCyte and pharmaceutical inventory associated with the launch of SURPASS. Turns were 1.7. For the full year we expect DSO to remain at current levels. Inventories of $80 to $85 million and fixed asset purchases of about $35 million.

I would now like to turn it over to Jon.

Thanks, Merilee for the -- for the overview. Obviously we had a very strong earnings quarter, and we were, in particular, pleased with the gross margins. In addition, it's nice to have some favorable resolution or progress on certain events contributing to the 9 cents in earnings that Merilee called out. The team at IDEXX really did a great job in the quarter, generating profit.

Turning to revenues our Companion Animal Group and our water business continued to drive the Company's top line growth in this quarter, at double digit rates. The Companion Animal Group had growth of 12%, adjusted for exchange, as Merilee mentioned. About 1.5% came from acquisitions, so organic growth, before the benefit of acquisitions and at constant currency was at about 10.5%, solid performance and consistent with our expectation.

Let me provide some comments from some of the individual CAG lines, Companion Animal Group lines. The rapid assay business saw good, continued growth in Q2, supported by the continued conversion of customers from heartworm only to our proprietary 3Dx SNAP test a three way parasitic disease screen. This quarter 56% of our canine heartworm tests sold in the U.S. clinic for 3Dx while last year in Q2 this number was 50%. And, of course in addition to the proprietary position we have in 3Dx, we also enjoy a more than one-third price premium. We do see more competitors in the heartworm only segment, and looking forward we expect that this will impact our growth here. However, the percentage of heartworm sales represented by 3Dx has grown steadily since we introduced that product in 2002 and our competitors do not offer competing multi analyte products.

Feline growth was lower than in Q1 as we did not have any special programmatic emphasis in the field this second quarter. Our new giardia test including our SNAP platform launched in Q1 in the U.S. and internationally in Q2 saw very good growth. Giardia is an intestinal parasite that affects dogs, cats and also humans. And while this product's revenue potential is modest, compared to our major rapid assay product, sales and sales in the quarter were very small. It did add a couple of points to the overall growth of our rapid assay line.

Looking to the second half of the year, we expect to have lower growth in rapid assays as we're coming up on some difficult year-over-year compares. I've mentioned this in the prior quarter calls but in the second half of the year of last year, we enjoyed higher sales of rapid assays due to the fact that one competitor, who competes at the lower end of the rapid assay market was out of the market. They returned with a heartworm product and are indicating that they will do the same with their feline leukemia and canine parvo virus products in the second half of the year.

We're very pleased with the strong results of our instruments and consumables business. We placed and recognized revenue on 322 LaserCyte hematology analyzers this quarter consistent with our expectations. This revolutionary new platform continues to be extremely well received by customers in North America and Europe. We realize some instrument manufacturing and service costs improvement in the quarter and yet have a ways to go with the plan that will roll out this quarter and over the next several. Included in this plan is a new version of the LaserCyte software released this week, that will bring further benefits to manufacturing and to the customer experience.

We also had impressive growth in our placement of IDEXX vet lab instruments in general that would be beyond just the LaserCyte instrument. This growth has been a result of the investment in our Companion Animal Group sales force over the last year. Instrument placement while only a small driver of current revenue are important, in that they grow our install base of instrumentation and thus sustain the growth of instrument consumables.

In addition to LaserCyte we provide four other platforms that make up the IDEXX vet lab, each of which has a proprietary consumable associated with it. The most important of which is VetTest, our dry slide chemistry instrument. The other three are the QBC vet auto read hematology unit, vet light electro light instrument and VetTest SNAP breeder for endocrinology. Our global unit placement of instruments of all types in the first half of 2004 was 50% higher than the first half of 2003. And the second quarter's growth accelerated from the first. And we had growth in all instrument categories.

Importantly, we believe that this growth rate significantly outpaced customer losses. We are certainly gratified to see this acceleration in instrument placements and resulting growth in install base. As this shows that our IDEXX vet lab instrument suite retains its clear Number 1 status in customer preference.

We continue to invest in our various instrument platforms beyond the investment in LaserCyte. Including our flagship VetTest chemistry machine. Over the next few months we will have completed the rollout globally of our new 12-pack single slide offering. In addition, in September, we are launching in the U.S. a new equine health profile that takes advantage of the uniqueness and breadth of our 21 chemistry menu. The new equine health profile is composed of 12 chemistries specifically designed for the wellness, diagnostic need of horses. We have also recently qualified LaserCyte and VetTest SNAP breeder for equine use, as well as actually having qualified 3Dx for the diagnosis of Lyme disease in horses. All of this filling out an already very comprehensive equine offering.

Finally we have in the development for launch in the next 12 months other important expansions and enhancements for the IDEXX Vet Lab. And these do not include our next generation chemistry slide machine, which, as a major new platform, is on a longer term development time frame. The instrument consumables revenue growth this quarter adjusted for currency and changes in distributor inventory was at the high end of our longer term expectation of 4 to 6% year-over-year growth and trends in the last few quarters continue to be favorable. Indeed, the instrument business has strengthened significantly over the past two years.

The lab business had a good quarter, with organic growth a little over 10%, adjusted for currency. As expected, we did not see a continuation of the high level of production animal testing in one of our international labs that we enjoyed in the first quarter. We are very pleased with the integration of two small lab acquisitions that we've made in the last year. Pharma growth came from three products PZI VET an insulin for diabetic cats and our two equine products, Navigator and SURPASS. Both launched within the last eight months. Navigator continues to be well-received by customers who prescribe the product as it is an extremely efficacious drug for a serious protozoal infection of the horse’s nervous system. This, infection, if not properly and effectively treated, can cause permanent nerve damage or death. However, our adoption rate for Navigator is slower than anticipated, and will take some time as the initial sale to the equine veterinarian requires significant support.

Our other equine product, SURPASS was launched in the first week of June. SURPASS is our topical cream for lameness in horses. It contains the non-steroidal anti-inflammatory drug or NSAID called diclofenac, using an unique liposomal formulation. With only weeks of market experience we're finding that customer feedback is very positive. SURPASS has the advantage of using only a fraction of the drug that would be required with a systemic therapy.

For example, about 73 milligrams instead of 2,000. And it's applied topically at the point of inflammation in the horse's knee or ankle. Our early experience in the market indicates that equine vets are quite accustomed to using oral systemic NSAID with lyposomes a new technology and topical a new mode of administration. So we expect that behavior change will be gradual.

As a result, we expect only modest sales this summer and fall riding season as we build awareness, word of mouth and prescriptions.

Taken all together, our current expectations for revenues of our pharma business in total for the second half of the year are modest, at about 5 to 6 million. Our other pharmaceutical product in the advanced stages of development is Tilmicosin, a single dose antibiotic treatment for cats. Our development status is generally unchanged from the update in last quarter. To remind investors the FDA in Q1 deemed our safety section for the Tilmicosin submission approvable which we are very pleased about. We have received some additional questions regarding the efficacy and manufacturing sections that will require some additional work on our part and subsequent a review by the FDA. None of the questions give us concern about the products approvability and the type of feedback that we have received is fairly typical for a novel technology like this.

As we have indicated previously, given the work that we need to do and the timing of the FDA review cycle we do not expect to launch and generate revenues from Tilmicosin from before 2006. Our progress with the FDA bodes very well for the current Tilmicosin new animal drug application. And we're very excited about the IDEXX developed proprietary drug delivery platform that underlies this product. We have other product candidates in the product pipeline that utilize this single dose technology.

In the production animal diagnostics business we continue to be as excited about the prospects for our postmortem test for BSE or mad cow disease. Our second generation BSE test utilizes a novel prion capture technology that eliminates the need for certain complex and air prone sample preparation steps required of all other tests for BSE. It works by using a chemical polymer devined (ph) to the rogue or diseased prion. In the presence of the naturally occurring or normal prion. All other tests must first use a proteinase digestion step in the sample preparation process to eliminate the naturally occurring prion protein from the sample before the binding step or else that natural would indicate a false positive. The USVA, National Veterinary Services Laboratory in Ames, Iowa has said they will be a customer for this test, starting as soon as their new laboratories finish, scheduled for next month. We are seeking additional U.S. business if and when the market expands; although it is quite small at this time.

Importantly our product is also in the EU approval process, and has completed the first round with very favorable results. Given the time frame of the EU process we don't expect European approval and IDEXX revenues before 2005 in this much larger BSE testing market.

The Base Production Animal business market had a challenging quarter, experiencing cyclical declines in the U.S. porcine market. In China, our joint venture is still in investment mode, completing our facility and working with our partner to obtain regulatory approval for locally manufactured product.

Our Water business had very good results for the quarter with currency adjusted growth of 11.5%. This business continues to see good growth in Europe on the heels of several market approvals over the last 24 months. In addition we saw good growth in our crypto sporidium testing in the UK. We expect to see continued strength in the water business near term, although longer term growth will moderate to mid to high single digits due to high customer penetration and increasing competition.

Let me turn to comments on our financial guidance for the remainder of the year and for the new guidance, for 2005. We expect revenues for the year to be $538 to $542 million and fully diluted earnings per share to be $2.11 to $2.13. Or $2.02 to $2.04 per share, adjusting for the benefit of the items this quarter mentioned by Merilee totaling 9 cents per share. This 2004 guidance is increased by 11 cents or 2 cents before the benefit of the 9 cents of items. This 2 cents increase is made up of our higher than expected second quarter performance of 5 cents reduced by 3 cents on forward-looking factors. As Merilee mentioned our revised estimate of the tax rate reduces earning per share by about a penny a quarter. In addition we have taken about a penny out of guidance primarily due to the more modest ramp of new pharmaceutical products as I just discussed.

We are also giving for the first time a preliminary view of guidance for 2005. With revenues of 590 to 600 million and earnings per fully diluted share of $2.20 to $2.25 which incorporates our revised estimate of tax rate for that year of 33.25%. As mentioned in our first quarter call, we think that our business has extremely attractive investment opportunities that will generate sustained returns in the year ahead. We're making these investments in the area of sales and marketing, R&D, and operational excellence.

Speaking of investments in return, let me comment on the longer business and market outlook, including not only for 2005, but in the years beyond. We have several factors that we expect to be contributors to attractive and sustained growth of long-term sales and earnings. First, the general robustness of our markets including the growth of the companion animal market driven fundamentally by the bond between the pet owner and their beloved companion or companions.

Second the prospects of our product development pipeline and new product launches including in the areas of instrumentation and their associated consumables, rapid assays, pharmaceuticals and BSE testing.

Third, a significantly improving cost position on our chemistry, dry slide consumables over the decade as a result of our reagent supply agreement and our expected growth in reagent volumes.

Fourth, the revenue growth and improved cost position in hematology, resulting from several factors, including improved unit costs on our revolutionary LaserCyte platform, and the growth of high margin LaserCyte consumables.

Fifth, continuous improvement in the margins of laboratory services line of business.

Sixth, growth from our international positions, including those in Europe, Japan, China and Australia.

Seventh and finally, the potential benefit that could come from the deployment of our strong cash position, including stock repurchases and acquisitions. Of course our business like any business has risks and uncertainties which are laid out in our SEC filings. However, we have a great team at IDEXX, a great strategic position, and I very much like the hand that we are holding right now.

So with that, Mike, I would like to open it up for questions.

Thank you, sir. The question-and-answer session will be conducted electronically. If you would like to ask a question, press the star key followed by the digit one on your telephone keypad. Once again, please press star one at this time. We'll take our first question from Timothy Lee with Merrill Lynch.

Hi, good morning, guys.

Good morning, Tim.

Just a question in terms of your outlook, particularly, you know for the second half of this year and next year, and the lack of leverage in the -- in the P&L given that, you know for the first half of this year you guys have tremendous earnings growth, far exceeding your top line gains here but as we look at the second half of this year and particularly next year based on kind of your current outlook, the leverage is not there. So what am I missing in terms of, you know, are we going to have a substantial step up in SG&A spending? If you could just kind of walk us through that.

Hi. Hi, Tim. It's -- this is Merilee. I think a couple of things, you know if you look at operating margin, where we were in the first quarter was 19%, and I think we said, you know, 18.5 to 19.5% for the back half of the year. A big driver in the second quarter as I mentioned was the gross margin and improvement in gross margin, and even on an adjusted basis there, that was up, you know, almost up 52%, so, you know, above where we had been expecting and where we expect to be in the second and the third quarters, primarily --

Third and fourth quarter.

I'm sorry, in the third and fourth quarters primarily mix, revenue mix is an issue in the back half of the year, rapid assays, which you know have some seasonality tend to be stronger in the first half of the year, so their revenues, relative to the total revenue mix become smaller in the back half of the year. And also instrument sales, you know , typically are strong in the back half of the year, particularly the fourth quarter. So that's why we've indicated that we expect that the gross margins will come down a bit from where they were here in the second quarter, you know, more to what we had seen in the first quarter. That's a piece of it. And, you know when you are looking at earnings per share, the other factor here, of course, is the increase in the effective tax rate that is going to, you know, drive a penny out of each of the second -- I'm sorry, the third and the fourth quarters.

And if you had mentioned this -- I apologize I want to jump off for a second here. In terms of the LaserCyte I know last quarter you mentioned some of the profitability profile of that product. Has that improved any in terms of the gross margin profile of the LaserCyte, Merilee?

I think we have seen some improvements there, you know, what -- well, in particular there are a couple of components. There's the manufacturing costs, we're continuing to work in that area, to stabilize the product and mentioned have seen some good benefits out of our efforts. As well, there's an important component of the after service support of the instrument, the warranty service and whatnot. And as we do go down the learning curve, and improve the stability of the instrument, we see that that impact, being multiplied over the base of the -- the install base of instruments we have in the field so --

Could you --

It's still early on there, but we are -- you know we are --

A lot of runway left there.

Could you quantify that in terms of -- I think last quarter you said the gross margin of the LaserCyte was in the low 20s. Are we kind of moving into the mid-20s now or are we still – just any sense of that.

You know, I think as you look at it on a per unit basis, you know, probably that -- that gross margin is still, you know, around 20 or maybe the low 20s. But as you look at it overall, and the -- the year-to-year improvement in gross margin, LaserCyte was about 1 point of that gross margin year-over-year improvement.

For the Company.

For the total Company.

Thank you.

Just another comment I might make, Tim, is as I indicated we think this is an investible business and so we're -- you know, we're -- in 2005, we think it's -- some of that lack of leverage is reinvestment in the business.

Thank you.

Once again, that's star one to ask a question. Moving on, we'll hear from Dee (ph) Akyatan with Bear Stearns.

Good morning. I have a couple of quick questions and I think Rick Wise will follow-up after me. On LaserCyte, could you just remind us, your sales practices, there were a lot of discussions in the course of the quarter in terms of placements sometimes without recognizing revenue. Is that a practice you follow, for example, for maybe lower volume accounts where you might get more margin on your reagent sales? Anything along those lines? That's 1. And the other one is clearly a strong point for IDEXX is your relationships with your distributors, the exclusive relationships. Can you remind us if these on some maybe three to five-year basis come up for renewal? Or how does that work? Thank you.

Let me take the distributor comment and then I will have Merilee talk about revenue recognition on the -- on LaserCyte. Our -- we've got great distributor relationships, and they are contractually, I think they go year-to-year, but we're -- we're very, very happy. I think we've got 10 or 11 U.S. distributors and we work extremely closely with them at all levels and they are very, very strong relationships for us.

And Dee, with regard to revenue recognition on instrument sales, first of all, with LaserCyte, we recognize revenue on those when -- only after the instrument has been delivered, installed and accepted by the customer. And I think what you may be referring to is with -- with some of our other instrument sales in our vet lab suite, we do some on more of a rental-type basis and then we do record revenue only as rental income, you know as we would earn that rental income over the course of the rental period.

The other thing, Dee, on -- just revenue recognition generally, of course is we have our practice developer program where customers earn points with purchases across multiple categories and we don't recognize the revenue on those points until they are actually cashed in. And a lot of times they cash them in for -- for LaserCyte or instruments but then we recognize only the revenue at the time of that, not at the time of the initial earning.

Then a quick follow-up on the distributor question then. I guess more specifically my question is, are these sort of on contract basis with the distributors and if so, do you have any coming up for renewal in the next 6 to 18 month time frame?

Well, I think they are on an annual renewal basis.

Okay.

They've been that way ever since incorporation.

Jon, Rick, a couple of quick ones as well. First I just want to make sure I understood the international mix shift issue and how it affected tax rate. Can you expand on that a little bit?

Sure, Rick, it's Merilee. I will be happy to do that. This area, of course, is pretty complex, in -- when anyone dealing in the international arena but we are assessed different tax rates depending on the jurisdiction where the income is earned. And in the simplest terms that I can make is we are currently forecasting to earn proportionally higher amounts of income in higher tax jurisdictions than we previously projected in the first quarter. We -- we're -- just to kind of expand on that a little, we're forecasting higher income where we have relatively less favorable rates and in some parts of the world, where we are doing some investing, you know, in other words, incurring losses in operations, they are in regions where we can't realize the tax benefits of those investments currently.

Great. And just to follow on that, are there any longer term implications to the tax rate and maybe reflect on how that might impact or not, '05?

Well, you know, I think it is hard to predict these things so, at this point, what we are reflecting or just saying for '05 is, you know, it -- people should be thinking of it as a 33.25% rate that we're seeing right now. And obviously we will continue to review that, and assess that, and should we feel that that would change, we would -- we would update people on our guidance.

Okay. And on the operating margin, I think you said second half operating margin 18.5 to 19%. That's about equal to the second half of '03, if I just average the second half numbers. I find it hard to believe that, given the operating margin improvement we've seen to date, we wouldn't see some -- you know we would see continued improvement. What am I missing?

Well, I think I -- I would just want to reiterate and, you know, we have made investments in the SG&A side. You know, we had been indicating that really even as we were exiting last year, and getting into this year, that -- that those investments we would see in the SG&A line, and so I think that's one driver. The other thing is, again, the -- the gross margin has been strong. It was particularly strong in the second quarter. It was also a little bit over 50% of revenues in the first quarter, and, again, given the seasonality of our revenue mix primarily, I think we would expect that that might come down a point or so in the back half of the year.

One of the reasons for that, Rick, is last year we had very strong year-over-year growth in rapid assay for a variety of reasons. One of those reasons was, of course, one of our competitors was out of the market and we enjoyed the benefits of that. This year, we will have, as I mentioned lower growth in rapid assay and that being a higher margin product, we'll go -- we'll have that mix issue, which will put a little pressure on the gross margin.

Okay thank you very much.

Of course, (indiscernible) with all of that, we have continually -- you know your question, the operating improvement and operating improvements that come from gross margin. So they all kind of equal out, if you will.

We'll now hear from Chris Montano with Well Fargo Securities.

Thank you. Congratulations on a nice quarter. Question regarding LaserCyte. Are you still on track for I think it was 1400 was that you mentioned in the shareholder meeting for fiscal year '04?

Yes, we are.

Excellent. And just looking at how many did you do last quarter? How many placements did you have?

In the second quarter we had 322.

No, I mean Q1.

Oh, I don't know the exact number. It was 325 plus or minus a couple.

323. 326, I'm sorry.

326. First quarter.

Thank you. And in terms of the competitive situation with regards to LaserCyte, are you at all running into some of your other competitors who are claiming that they have new hematology products out there as well?

I don't think there's anything that compares to LaserCyte in terms of its technology, and in terms of its ease of use, and capability, and so we are -- we really think we have a very, very unique position to provide the vets the ability to practice medicine they want to practice, to give them the full capability they would have if they, you know, sent the sample in to one of our reference labs.

Okay. Great. Excellent. And then lastly, with respect to the dynamic between in-house testing for vets and laboratory services, it sounds like you saw a nice growth in your consumables and your instrument placements, as you mentioned. Are you seeing that growing in addition to labs nicely going forward or is there some tradeoff that may eventually occur in that zone?

I don't -- I don't think there's any particular -- we don't really detect any trends one way or the other between in-clinic testing and testing in the reference lab. I think in some parts -- in some ways testing begets testing. A lot of times they will test to get the right -- to get their immediate result in the clinic and then send it to the lab for confirmatory. There are a lot of tests that can only be done in a lab that can't be done in clinic, certainly any kind of histopathology and microbiology. And so I see robust growth really in both locations.

Thank you very much.

Once again to ask a question, please press star 1 at this time. And we have no further questions at this time. Mr. Ayers, I will turn things back over to you.

All right I would like to thank everybody for joining us on the call. I would also like to congratulate the IDEXX team for really a great quarter in terms of earnings and performance and we'll talk to you all next quarter. Thank you.

That concludes today's teleconference. We thank you for your participation. You may now disconnect.